Indirect Cost Rates

Indirect Cost Rates

Indirect cost rates are for use in the award and management of federal (and state) contracts, grants, and other assistance arrangements governed by Office of Management and Budget (OMB) Circular A-87 and Education Department General Administrative Regulations (EDGAR) 34 CFR parts 75.561 and 76.561(b) and (c). They are expenses that are incurred for the joint benefit of more than one project and cannot be readily and specifically identified with a particular project without effort disproportionate to the results achieved. Indirect Costs can ONLY be applied to federally funded projects. However, they may be restricted or disallowed on some federal grants. The maximum amount payable is calculated by multiplying the Approved Restricted Rate (ARR) times the Actual Subtotal Expenditures (ASE). Click here to download the Maximum Allowable Indirect Cost Matrix by grant.

Upon submittal of an Annual Financial Report (AFR) to School Finance, a LEA (district or charter school) may request that the ADE calculate an Indirect Cost Rate (ICR) by selecting “Yes” in the drop-down menu provided in the AFR, and then submitting the additional required information. The ADE then calculates a restricted and a non-restricted rate and notifies the LEA of the approved restricted rate for use with State and Federal grants. Other entities (e.g. community-based organizations, community colleges and universities, state agencies, etc.) must provide to ADE a copy of the letter of Indirect Cost from their cognizant agency showing their approved ICR in order for it to be entered into the Grants system.

What are indirect costs?

Indirect costs are agency-wide, general management costs (i.e., activities for the direction and control of the agency as a whole). General management costs consist of administrative activities necessary for the general operation of the agency, such as accounting, budgeting, payroll preparation, personnel services, purchasing, and centralized data processing.

Conversely, direct costs are costs that provide measurable, direct benefits to particular programs. For LEAs, these can include costs that relate directly to instructional programs and also support costs that relate to the peripheral services necessary to maintain the instructional programs. Examples of LEA direct costs include salaries and benefits of teachers and instructional aides, payments for textbooks, instructional supply purchases, and pupil service costs (e.g., counseling, health services, pupil transportation).

Indirect Costs can only be applied to federally funded projects, however, may be restricted or disallowed by some federal grants.

What is an indirect cost rate?

In general terms, an indirect cost rate is the percentage of an organization’s indirect costs to its direct costs and is a standardized method of charging individual programs for their share of indirect costs.

Why use an indirect cost rate? How does it benefit an organization?

General management costs are necessary for any program to exist. For instance, all programs will use the business office at one time or another for services such as contracts, purchasing, payroll checks, and personnel management. Without the benefit of an indirect cost rate, there would be no standard way for each program to contribute its share of the general management costs without spending a lot of staff time having to “time account” to each activity. By using an indirect cost rate, LEAs have a standardized, efficient way to recover a share of general management costs from individual programs.

How is an indirect cost rate calculated?

The Arizona Department of Education (ADE) has been granted authority by the ED to review and approve indirect cost rates for Arizona LEAs (county offices of education, school districts, joint powers agencies, and charter schools).

LEAs annually submit Form ICR to the ADE along with their year-end financial reports. Once all LEA year-end financial data have been collected and reviewed by the ADE, a listing of approved indirect cost rates is posted.

In the absence of statutory or regulatory language that would prohibit claiming indirect costs (e.g., if the legislation is silent on the subject of indirect costs), then indirect costs can generally be charged. But, if the authorizing legislation says that funds must be spent solely on the item in question, then indirect costs cannot usually be claimed. For instance, if a program states that funds are specifically limited to instructional materials, then charging indirect costs would not be allowed. (Because the statutes and regulations vary by program, questions on whether indirect costs can be charged to a specific program should be directed to the ADE unit responsible for administering the program.)

Is there a cap or limit on the amount of indirect costs that can be charged?

An LEA may claim up to its approved indirect cost rate unless there is specific authority (legislation or regulation) to limit the rate. For instance, if program statutory or regulatory language limits indirect costs to 3 percent, and an LEA has an approved rate of 5.25 percent, only 3 percent can be charged to the program for indirect costs; if the LEA had an approved rate of 2.75 percent, only 2.75 percent could be charged.

How do I use the indirect cost rate to recover/charge indirect costs?

If indirect costs are allowed, the indirect cost rate can be used to budget the maximum amount of indirect costs allowable for a program and then to claim the actual amount of indirect costs after the program expenditures have been made. It is important to remember that when recovering/charging indirect costs, the indirect cost rate is applied to the amount actually expended, not the total amount budgeted.

Example of budgeting for indirect costs: Assume an LEA’s approved indirect cost rate is 8.00 percent and the grant amount is $10,000. The LEA plans to spend the entire $10,000 in the same fiscal year and does not expect to spend any of the $10,000 on excluded costs (see question 5 for further information on excluded costs). Since the grant amount is for $10,000, and indirect costs are part of the grant amount rather than in addition to it, you must back into a budgeted indirect cost amount that keeps the grant from exceeding $10,000. To do this, divide $10,000 by 1.08, which equals $9,259.26. Then subtract $9,259.26 from $10,000, which equals $740.74. The $740.74 is the maximum amount the LEA could budget for indirect costs. (To test this, $9,259.26 times 8.00 percent equals $740.74, and $9,259.26 plus $740.74 equals $10,000.)

Example of charging indirect costs: Assume an LEA’s approved indirect cost rate is 8.00 percent and the grant amount is $10,000. During the year, the LEA’s actual grant expenditures totaled $8,000, of which $786 was for capital outlay (see question 5 for further information on capital outlay). The maximum amount that can be charged to the grant for indirect costs is $577.12, which is $7,214 ($8,000 minus $786) times 8.00 percent.

Does an LEA have to charge the entire amount of indirect costs allowed by its indirect cost rate?

An LEA may choose to claim less than the amount of indirect costs allowed by its indirect cost rate. Amounts not claimed under one award may not be shifted to another award, unless specifically authorized by legislation or regulation.

What about claiming indirect costs in contracts between LEAs and the ADE?

When indirect costs are allowed, LEAs should use their ADE-approved indirect cost rate as the basis for budgeting and claiming indirect cost reimbursements under contracts with the ADE. Contracts that cover more than one year should be structured to allow for adjustments for any rate(s) not yet known.

Do districts and district sponsored charter schools have to calculate their County School Superintendents Indirect Cost Rate as a percentage of their Indirect Cost and how is the percentage of the County School Superintendents Indirect Cost Rate budgeted?

Arizona State law states that County School Superintendents (CSS) will handle the fiscal activities of districts (Title 15.304) including federal grant funds, unless the district has been approved for fiscal independence (R7-2-902). There are no additional federal appropriations to cover the CSS responsibilities of handling districts’ federal projects. Effective 2008, districts are allowed to charge combined indirect cost rate.

If the district or district sponsored charter school gets approved for a 2% Indirect Cost Rate and their County School Superintendents Indirect Cost approved rate is 1.75%,the district can charge 3.75% combined indirect cost rate to cover the county’s indirect cost rate.

Why is my LEA’s Indirect Cost Rate set at zero on the budget page?

If a zero is indicated as the Indirect Cost Rate (ICR), either the entity did not request that the ADE calculate a yearly rate (on the most recent AFR) or it did not submit the required documentation, a copy of the letter of Indirect Cost from their cognizant agency, or was not approved for an ICR for that fiscal year. All entities are encouraged to apply for a yearly rate.

Which line items are subject to the “20% or $1,000, whichever is greater” rule?

All approved budget line items except Indirect Cost.

Who is the cognizant Agency for the ADE and Arizona LEAs?

The U.S. Department of Education is the cognizant agency for ADE. The ADE is the cognizant agency for school districts, charter holders, and county school superintendent offices.

Community Colleges, universities, Arizona state agencies, local agencies, and non-profit organizations that wish to receive an approved indirect cost rate should send an Indirect Cost Rate Agreement that has been issued by its cognizant agency to Grants Management.

Combined Indirect Cost Rates

School districts may use a Combined Indirect Cost Rate (CICR) against their grant projects. The CICR is only applied to school districts if their County School Superintendent (CSS) handles the fiscal activities of districts including federal grant funds. The CICR is not applicable to a school district that has been approved for fiscal independence (R7-2-902: Pilot District).